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Deputy President I R Molloy
CATCHWORDS
TAXATION – Income tax – Capital gains tax (CGT) – Joint tenants – No exemption as a trustee –Main residence exemption not applicable – Liable to pay 50% of the capital gain on disposal – Objection decision affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth) ss 103-10, 106-50, 108-7, 118-110
CASES
Baumgartner v Baumgartner [1987] HCA 59; (1987) 164 CLR 137
Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583
REASONS FOR DECISION
Deputy President I R Molloy
17 September 2013
INTRODUCTION
In April 2002 Mr Gerbic purchased a town-house at Mount Coolum for his adult son Justin to reside in. To guard against his son acting unwisely, Mr Gerbic had the property transferred to himself and his son as joint tenants.
Justin lived in the town-house until 2007 when he moved into a house at Coolum Beach. The Coolum Beach property was purchased by Justin and his mother. The purchase was financed through a loan from Westpac secured by a mortgage over each of the properties.
In September 2007 the town-house was sold and the proceeds of sale were used to reduce the debt to Westpac. At the same time Westpac released Mr Gerbic from a guarantee he had given.
Mr Gerbic was assessed for the 2008 income year for capital gains tax (“CGT”) on 50% of the net capital gain arising from the sale of the town-house.[1] He applies for review of the decision disallowing his objection.
ISSUES
The issues are:
did Mr Gerbic make a capital gain on disposal of the town-house;
did Mr Gerbic hold his interest in the town-house on trust for his son so that he was exempt from CGT;
does the exemption for principal place of residence apply to Mr Gerbic.
DID MR GERBIC MAKE A CAPITAL GAIN?
There is no dispute that the town-house was sold for a capital gain or as to the amount of that gain.
Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset, constituted by an equal interest in the asset, and as if each of them held that interest as a tenant in common: Income Tax Assessment Act 1997 (Cth) (“ITAA”), s 108-7.
As one of two joint tenants, Mr Gerbic was assessed on a 50% share of the net capital gain.
Mr Gerbic said it was never his intention to profit from the sale of the town-house.
He said he only went on the title to protect his ‘inexperienced’ son of 23 years from doing something ‘silly’ and selling the town-house on a whim.
These matters do not alter his liability, as an owner of a half interest in the town-house, for CGT on 50% of the capital gain on its disposal.
Mr Gerbic also said he did not receive any of the proceeds of sale of the town-house. After payment of expenses, such as agent’s commission and legal fees, everything went towards reduction of the loan used to purchase the Coolum Beach property in which he had no interest.
As a joint tenant Mr Gerbic had an entitlement to half the proceeds of sale. His decision to use his share of the proceeds to reduce the debt to Westpac was his choice. For CGT purposes a person is treated as having received money if it is applied as he or she directs: ITTA, s 103-10.
Mr Gerbic did make a capital gain in respect of the disposal of his half interest in the town-house.
IS THERE AN EXEMPTION AS TRUSTEE?
The CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for another person and the other person was absolutely entitled to that asset as against the trustee: ITAA, s 106-50.
Mr Gerbic said that if he had known of his potential liability he would have signed a trust deed declaring that he held his interest in the town-house on behalf his son. That, of course, may have defeated the purpose of having the title in both names. However, there was no written declaration of trust, as Mr Gerbic concedes.
Similarly, there is an absence of words or conduct from which an intention to create a trust could be inferred. Mr Gerbic said he became a joint owner to prevent Justin dealing with the property ‘on a whim’. He said his intention was that the property be solely for Justin’s benefit in the event he wished to ‘upgrade’.
Contrary to a trust as contemplated by the legislation, this evidence indicates an intention on the part of Mr Gerbic that Justin should not have an absolute entitlement to the property. In the circumstances it is unnecessary to consider the requirement that a declaration of trust respecting land be manifested and evidenced by writing: Property Law Act 1974 (Qld), s 11(1)(b).
The Commissioner for completeness canvassed the possibility of a constructive trust, citing cases such as Baumgartner v Baumgartner [1987] HCA 59; (1987) 164 CLR 137; and Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583.
Mr Gerbic paid cash for the town-house. His son did not contribute anything towards the purchase, and did not pay any money to Mr Gerbic towards his share. There was no evidence that Justin paid anything in the nature of rent to Mr Gerbic.
Justin paid for maintenance and recurring expenses associated with the property, such as council rates, body corporate levies, and electricity and telephone bills. Mr Gerbic paid some of these expenses while his son was unemployed. Mr Gerbic also appears to have paid for improvements to the bathroom, and for a new hot water heater.
These facts do not support a finding of a constructive trust of Mr Gerbic’s interest in the property for the benefit of Justin.
Mr Gerbic did not hold his share in the property on trust so as to entitle him to an exemption from CGT.
DOES THE EXEMPTION FOR MAIN RESIDENCE APPLY?
As joint tenants Mr Gerbic and his son are regarded as each owning a separate CGT asset, being a 50% interest in the town-house held as a tenant in common:
ITAA, s 108-7.
The capital gain made from the disposal of a dwelling, or an interest in a dwelling, will be disregarded in the case of an individual, if the dwelling was his or her main residence throughout the period of ownership: ITAA, s 118-110.
The circumstances of each co-owner must be considered separately. The Commissioner does not dispute that Justin was entitled to the principal place of residence exemption in respect of his interest in the property.
To be eligible for the exemption in respect of his liability for CGT on disposal of his interest in the property, Mr Gerbic would have had to reside in the town-house himself.
It is not sufficient that it was a co-owner’s main residence.
The exemption from liability in respect of a main dwelling does not apply to Mr Gerbic.
CONCLUSION
The objection decision is affirmed. |
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